A cuppa and a catch up with… David Coombs

Rathbone Strategic Growth Portfolio is a multi-asset fund which resides in the IA Volatility Managed sector. Its objective is to return 3% to 5% above inflation over a minimum five-year period. It aims to do so with less than two-thirds of the volatility of the MSCI World equity index.

I caught up with the manager, David Coombs, to discuss Rogue Traders, not trying to be a superhero and why he thinks the US equity market will give the best returns in the next decade.

David, you’ve worked in financial services for thirty years now. What are some of the most important lessons you have learned over this time, and how do they shape your investment process now?

“I learned a very valuable lesson following my time at merchant bank Barings, which went bust after trader Nick Leeson committed fraud and single-handedly caused the demise of the company. Or so people say.

“Yes, there was a trader who was of course acting inappropriately, but he had to have a lot of incompetency surrounding him in order for that to happen; the culture of the company was very hierarchical and ideas weren’t challenged, for instance.

“This taught me that the biggest risk to any company is complacency and arrogance – something I look for when making investment decisions myself. If a business doesn’t consistently challenge itself and look to evolve, there is every chance that it can go from being incredibly successful to bankrupt, sometimes in a very short period of time.

“Secondly, a piece of advice that has long stuck with me comes from a former colleague of mine – Percival Stanion – who sadly passed away recently. He told me that the perfect multi-asset portfolio for the very long-term investor would be 40% index-linked bonds, and 60% emerging market equities.

“We have to bear in mind that this advice was given to me 10 or 15 years ago and so the behaviour of assets has changed – perhaps you could swap emerging market equities for technology stocks nowadays for instance – but it reminds me that you don’t need to over-diversify to minimise risk, and that it’s about looking beyond a benchmark.

“It’s an example of thinking about risk in absolute returns and it’s very simple, but often some of the best ideas are. We can sometimes overcomplicate matters.

“Finally, I have learned that I should never strive to be right all the time. I’m inevitably going to make mistakes along the way and I have to be willing to do so. So, it’s about managing your risk appropriately and being pragmatic, rather than trying to be a superhero.”

Have you had to suffer any steep learning curves to learn these lessons?

“The learning curve never ends – it just goes from bottom left to top right.

“The investment backdrop is forever changing. Today, for instance, we have the rise of artificial intelligence and virtual reality, we have Brexit – and nothing I have learned so far could have prepared me for any of these factors.

“It’s key not to focus too much on history and decide you are one step closer to becoming a perfect investor because, as we say in the world of investing, the past is a pretty poor predictor of the future – that’s how mistakes happen. So in essence, my learning curve is more of a 45 degree line.”

Are there any market areas which a lot of investors are nervous about, but where you are finding opportunities?

“A lot of investors believe the US market is expensive and should underperform, but I actually believe the contrary. I was recently asked which asset class I think is most likely to produce the best returns over the next 10 years, and I said it could be the US equity market. I also think that’s true over three, four or five years as well. There is a lot of innovation taking place in the US and I am seeing more individual stock opportunities there.

“On that note, I don’t see much value in making big asset class calls today; I think it is very much a stockpicker’s market. That is chiefly to do with some of the big structural shifts we’re seeing – whether it’s combating obesity, the retail industry trying to reorganise itself, or the auto industry’s shift to producing electric vehicles. I think there are huge investment opportunities out there now, but huge threats to existing businesses as well.

“Ultimately, the huge returns to be made are in the companies which are embracing these massive structural changes, but they’re not nicely lumped together in one geographical region.”